CAPM

Question 1

beta formula

Answer 1

sigma(iM) / sigma(M)^2

sigma(iM) = covariance between stock’s return and market’s return
sigma(M)^2 = variance of the market’s return

Question 2

CAPM formula

Answer 2

r(i) - r(f) = beta(i) (r(M) - r (f))

r(i) - r(f) = expected risk premium on stock
(r(M) - r (f)) = expected market risk premium

Question 3

CAPM

Answer 3

capital asset pricing model

Question 4

capital market line vs security market line

Answer 4

capital market line: applies to efficient portfolios only

security market line: applies to all stocks & portfolios (efficient or not)